Quarterly Report — Small Business — Form 10-QSB Filing Table of Contents
Document/ExhibitDescriptionPagesSize 1: 10QSB September 30, 2007 Form 10-Qsb HTML 142K
2: EX-10.1 Dietler Subscription Agreement HTML 29K
3: EX-10.2 Murchison Capital Partners HTML 31K
4: EX-10.3 Yorktown Energy Partners Vii L.P. Subscription HTML 31K
Agreement
5: EX-10.4 Lubar Equity Fund LLC Subscription Agreement HTML 31K
6: EX-10.5 Tecovas Partners V L.P. HTML 31K
9: EX-10.6 Savoy Purchase and Sale Agreement 100507 HTML 92K
7: EX-31 Sox 302 Certification HTML 14K
8: EX-32 Sox 906 Certification HTML 9K
Check
whether the
issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of
the
Exchange Act during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such
filing requirements for the past 90 days. Yes þ No o
Indicate
by check
mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the
Exchange Act). Yes o No þ
Income
(loss)
before minority interest and income taxes
(1,856
)
121
(466
)
(404
)
Minority
interest
320
30
Income
(loss)
before income taxes
(1,536
)
121
(436
)
(404
)
Income
tax
benefit
125
320
Net
income
(loss)
$
(1,536
)
$
246
$
(436
)
$
(84
)
Net
income
(loss) per share, basic
$
(.12
)
$
.02
$
(.03
)
$
(.01
)
Weighted
average shares outstanding-basic
12,320
11,562
12,619
12,168
See
accompanying
notes.
3
Condensed
Consolidated
Statement of Cash Flows
Nine
months ended
September 30,
(in
thousands)
2007
2006
Net
cash used
for operating activities
$
(1,483
)
$
(882
)
Cash
flows
from investing activities:
Acquisition
of Sunrise coal, net of acquired cash of $1,892
(5,828
)
Capital
expenditures for properties
(12,094
)
(4,312
)
Sales
of oil
and gas properties
2,456
3,394
Distribution
from Savoy
518
Other
131
(26
)
Net
cash used
for investing activities
(9,507
)
(6,254
)
Cash
flows
from financing activities:
Proceeds
from
bank debt
7,140
Stock
sale to
related parties
7,000
Capital
contributions from Sunrise minority owners
800
Proceeds
from
exercise of stock options
460
Other
(136
)
Net
cash
provided by financing activities
8,264
7,000
Net
decrease
in cash and cash equivalents
(2,726
)
(136
)
Cash
and cash
equivalents, beginning of period
7,206
12,261
Cash
and cash
equivalents, end of period
$
4,480
$
12,125
Supplemental
disclosures of cash flow information:
Cash
paid for
interest (net of amount capitalized-$230 and $290)
$
1,710
$
190
Income
tax
$
$
432
Non-cash
investing and financing activities:
Change
in
accrual for coal properties
$
1,371
$
170
See
accompanying notes.
4
Notes
to
Financial Statements
1.
General
Business
The
interim
financial data is unaudited; however, in our opinion, it includes all
adjustments, consisting only of normal recurring adjustments necessary for
a
fair statement of the results for the interim periods. The financial statements
included herein have been prepared pursuant to the SEC’s rules and regulations;
accordingly, certain information and footnote disclosures normally included
in
GAAP financial statements have been condensed or omitted.
Our
organization
and business, the accounting policies we follow and other information, are
contained in the notes to our financial statements filed as part of our 2006
Form 10-KSB. This quarterly report should be read in conjunction with that
annual report.
The
accompanying
consolidated financial statements include the accounts of Hallador Petroleum
Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated. We are engaged in the production of coal
from
an underground mine located in western Indiana. We also own a 45% equity
interest (32% as of September 30, 2007) in Savoy Energy, LLC, a private oil
and
gas company operating primarily in Michigan.
As
discussed in prior filings, we have entered into significant related party
capital transactions with the Yorktown group of companies. Yorktown owns about
55% of our common stock and represents one of the five seats on our
board.
Since
the July 2007
sale of the San Juan properties, we have deemphasized our oil and gas operations
and are concentrating our efforts in the coal business. Oil and gas operations
for 2006 are combined with the "other" caption in the statement of operations.
Oil and gas sales for the nine months ended September 30, 2006 were $738,000
and
the related expenses were $216,000; oil and gas sales for the three months
ended
September 30, 2006 were $229,000 and the related expenses were
$61,000.
2.Stock
Options
Effective
January1, 2006, we adopted the fair value recognition provisions of SFAS 123R, using
the modified prospective transition method, and therefore, have not restated
prior periods' results.
In
April 2005, we granted 750,000 options at an exercise price of $2.30. These
options vest at 1/3 per year from the date of grant and expire in April 2015.
On
July 9, 2007 Mr. Stabio, our CEO, exercised 200,000 options, which are now
available for re-issuance.
We
estimated the fair value of the option grant using the Black-Scholes
option-pricing model, with the following assumptions: (i) risk free interest
rate of 4.24%; (ii) expected life of 10 years; (iii) expected volatility of
120%; and (iv) expected default rate of 5%, and (v) no dividend yield. The
average fair value of options granted during 2005 was $2.19. At September 30,2007, our 550,000 outstanding stock options had a remaining contractual maturity
of eight years and an aggregate intrinsic value of about $412,000.
5
The
total
compensation expense related to this plan was about $350,000 for both the nine
month periods ended September 30. The impact on earnings per share was about
$.03 for both periods. Assuming no more grants, we estimate that for each of
the
next two quarters, we will expense about $108,000 for stock options or $216,000
in total.
3.Sunrise
Coal Acquisition
As
discussed in the 2006 Form 10-KSB on July 31, 2006 we entered into a joint
venture (JV) with Sunrise. The original Sunrise members retained a 40% interest
in the venture, and we agreed to contribute capital of $20.5 million for a
60%
interest.
During
the second
quarter 2007, we completed our $20.5 million funding commitment. Through
approximately 87% of the JVs cash flow, we will receive $20.5 million plus
interest at 10%. Thereafter, cash flow will be distributed 60% to us, and 40%
to
the original Sunrise members. All of our contributions were used for mine
development and no funds were distributed to any of the original JV
partners.
On
July 31, 2006 (date of acquisition), we began consolidating the Sunrise JV;
because, at the date of acquisition, the original Sunrise members had not
contributed capital in excess of accumulated losses, we have reflected Sunrise’s
entire losses for the period since acquisition. When Sunrise’s accumulated
earnings exceed its prior losses or if the original Sunrise members make
additional capital contributions, we will reflect the original members’ minority
interest in the results of operations. In the first quarter of 2007, the
original Sunrise members made a capital contribution of about $800,000.
Consequently,
we
have recorded a minority interest amount of $174,000 based on 13% of Sunrise's
year to date loss of about $1.3 million; in addition, we have recorded a
minority interest of $146,000 as a recoupment of Sunrise's 2006 loss based
on
13% of about $1.1 million.
Included
in
liabilities assumed for the Sunrise acquisition is the estimated present value
of the possible contract termination obligation (about $4 million; $4.3 million
considering accretion charges) with the utility that was to purchase the coal
from the Howesville mine; such mine was closed for safety reasons in June 2006.
This possible $4 million obligation was based on an offer made to the
utility. The utility to date has not accepted our offer and no final settlement
agreement has been consummated.
6
4.Investment
in Savoy
On
October 5, 2007 we acquired for $6 million an additional 13% interest in Savoy
Energy, LLP, a private oil and gas company operating primarily in Michigan.
We
now have a total interest in Savoy of about 45%. We account for our interest
in
Savoy using the equity method of accounting.
Below
(in
thousands) are: (i) a condensed balance sheet at September 30, 2007, and (ii)
a
condensed statement of operations for the nine months ended September 30,2007.
Condensed Balance Sheet
Current
assets
$
8,124
PP&E,
net
10,442
$
18,566
Total liabilities
$
3,239
Partners'
capital
15,327
$
18,566
Condensed Statement of Operations
Revenue
$
4,099
Expenses
(3,207)
Net
income
$
892
The
difference
between the purchase price and our pro rata share of the equity of Savoy is
being amortized based on Savoy's units of production rate using proved reserves.
Such amount was about $82,000 for the first nine months of 2007.
To
the extent that distributions from Savoy represent a return on capital, they
are
reflected as cash flows from operating activities. Otherwise, they are reflected
as cash flows from investing activities.
5. Bank
Debt and Interest
Rates Swaps
In
late June 2007, our Indiana banks agreed to increase the Sunrise line of
credit (LOC) from $30 million to $40 million. The additional funds will be
used
to purchase certain mining equipment, build a rail loop, and working capital.
As
of November 13, 2007, we have drawn down about $35.4 million; plus we have
outstanding letters of credit for another $2.5 million that leaves us with
about
$2 million left on the $40 million LOC. The current interest rate is LIBOR
(4.71%) plus 3.55% or 8.26%. As discussed below, Sunrise entered into two
interest rate swaps. As LIBOR rates increase the fair value of the swaps will
increase, and conversely, as LIBOR rates decrease so will the fair value of
the
swaps.
Under
the new LOC
with the banks no principal payments are due until the end of July 2008;
assuming the full $40 million LOC is drawn, we will begin making monthly
payments (principal and interest) of about $600,000 through June
2015.
Accounting
rules
require us to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through earnings.
We have no derivatives designated as a hedge.
7
We
have entered into two interest rate swap agreements swapping variable rates
for
fixed rates. The first swap agreement is relative to the $30 million LOC and
is
effective commencing July 15, 2007 and matures on July 15, 2012. The second
swap
agreement relates to the additional $10 million that increased Sunrises' LOC
to
$40 million. This second swap agreement is effective commencing December 28,2007 and matures on December 28, 2011. The two swap agreements fix our interest
rate at about 8.8%. At September 30, 2007, we recorded the fair value of the
two
swaps as a $536,000 liability with a corresponding charge to interest
expense.
6. Sale
of San
Juan Oil and Gas Properties
In
early July 2007 we sold our interest in the San Juan properties for $2.3
million. We recognized a gain of about $1.8 million. We continue to be the
operator for these properties.
Other
than our
equity investment in Savoy, our remaining oil and gas properties are not
significant and we will be making minimal disclosures, if any, regarding
them.
7.
Restricted
Stock Grants
On
June 20, 2007, the Board authorized and granted the issuance of 600,000 shares
of restricted stock. Victor Stabio, our CEO, received 390,000 shares, Brent
Bilsland, Sunrise’s President, received 165,000 shares and two consultants
received 45,000 shares. The Board allowed Mr. Stabio's shares to vest on July9,2007. Mr. Stabio's shares for GAAP accounting purposes were valued at $3.25
on
the date of grant based on the closing price on that date. The Board allowed
Mr.
Bilsland’s shares to vest on August 9, 2007. Mr. Bilsland's shares for GAAP
accounting purposes were valued at $3.25 on the date of grant based on the
closing price on that date. The other shares vest at the end of three
years.
We
took a charge of about $1.8 million for these vested shares. We will amortize
$146,000 to expense over 36 months for the other shares.
Of
the 390,000 shares granted to Mr. Stabio, 125,000 shares were relinquished
back
to the company as consideration for the income taxes due.
8.
Subsequent
Events
On
October 5, 2007, we sold 3,564,517 shares of common stock for an aggregate
cash
purchase price of about $11 million ($3.10 per share). The shares were sold
to
investors in
a private
placement transaction. The proceeds from the sale were used to purchase an
additional 13% interest in Savoy for $6 million which brings our total ownership
to about 45%. The remaining $5 million will be used for general corporate
purposes.
8
ITEM
2.
MD&A
THE
FOLLOWING
DISCUSSION UPDATES THE MD&A SECTION OF OUR 2006 FORM 10-KSB WHICH WAS FILED
ON APRIL 16, 2007 AND SHOULD BE READ IN CONJUNCTION THERETO.
Liquidity
and Capital Resources
In
late June 2007, our Indiana banks agreed to increase the Sunrise line of credit
(LOC) from $30 million to $40 million. The additional funds will be used to
purchase certain mining equipment, build a rail loop, and working capital.
With
the purchase of additional equipment we expect our annual coal production
capabilities to increase from about 800,000 tons to about 1,600,000 tons.
Currently, we have drawn down about $35.4 million on the Sunrise $40 million
LOC. The current interest rate is LIBOR (4.71%) plus 3.55% or 8.26%. As
discussed below, Sunrise entered into two interest rate swaps. As LIBOR rates
increase the fair value of the swaps will increase, and conversely, as LIBOR
rates decrease so will the fair value of the swaps.
Under
the new LOC
with the banks no principal payments are due until the end of July 2008;
assuming the full $40 million LOC is drawn, we will begin making monthly
payments (principal and interest) of about $600,000 through June
2015.
Accounting
rules
require us to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through earnings.
We have no derivatives designated as a hedge.
We
have entered into two interest rate swap agreements swapping variable rates
for
fixed rates. The first swap agreement is relative to the $30 million LOC and
is
effective commencing July 15, 2007 and matures on July 15, 2012. The second
swap
agreement relates to the additional $10 million that increased Sunrises' LOC
to
$40 million. This second swap agreement is effective commencing December 28,2007 and matures on December 28, 2011. The two swap agreements fix our interest
rate at about 8.8%. At September 30, 2007, we recorded the fair value of the
two
swaps as a $536,000 liability with a corresponding charge to interest expense.
As of November 13, 2007, the fair value of the interest rate swaps was a
liability of about $813,000.
We
may be required to raise additional capital to fund mine development and
expansion. There can be no assurances that we will be able to raise additional
capital on terms which would be acceptable to us.
October
Sale of Stock to Yorktown and Others
On
October 5, 2007,
we sold 3,564,517 shares of our common stock for about $11 million cash ($3.10
per share). The shares were sold to investors in
a private
placement transaction. The proceeds from the sale were used to purchase an
additional 13% interest in Savoy for $6 million which brings our total ownership
to about 45%. The remaining $5 million will be used for general corporate
purposes.
As
discussed in prior filings, we have entered into significant related party
capital transactions with the Yorktown group of companies. Yorktown owns about
55% of our common stock and represents one of the five seats on our
board.
9
Results
of Operations
In
2007, we have shipped coal to three utilities. We expect total coal shipments
for 2007 to reach 980,000 tons. Starting in 2008 - 2013, we have contracts
with
multiple utilities; total annual sales range from 1.4 million tons per year
to
1.9 million tons per year.
We
expect to make a small profit for the fourth quarter.
We
had no coal operations for the comparable periods in 2006; therefore, there
is
no need to discuss changes in the accounts.
The
increase in
property sales was due to the sale of San Juan as discussed below.
Interest
income was
less due to a significant lower amount of investable funds during the
periods.
G&A
increased
due to the restricted stock grants to Mr. Stabio and Mr. Bilsland which were
about $1.8 million. In addition, G&A related to the coal operations were
about $700,000 during 2007; we had no such expenses in 2006.
The
interest
expense relates solely to the debt connected with the Sunrise
acquisition.
Sale
of
Oil and Gas Properties
In
early July 2007 we sold our interest in the San Juan properties for $2.3
million. We recognized a gain of about $1.8 million.
Other
than our
equity investment in Savoy, our remaining oil and gas properties are not
significant and we will be making minimal disclosures, if any, regarding
them.
Savoy
The
decrease in the
equity income was due to lower oil and gas sales of about $800,000 due to lower
production and prices offset by lower exploration costs of about
$370,000.
Restricted
Stock Grants
On
June 20, 2007, the Board authorized and granted the issuance of 600,000 shares
of restricted stock. Victor Stabio, our CEO, received 390,000 shares, Brent
Bilsland, Sunrise’s President, received 165,000 shares and two consultants
received 45,000 shares. The Board allowed Mr. Stabio's shares to vest on July9,2007. Mr. Stabio's shares for GAAP accounting purposes were valued at $3.25
on
the date of grant based on the closing price on that date. The Board allowed
Mr.
Bilsland's shares to vest on August 9, 2007. Mr. Bilsland's shares for GAAP
accounting purposes were valued at $3.25 on the date of grant based on the
closing price on that date. The other shares vest at the end of three
years.
We
took a charge of about $1.8 million for these vested shares. We will amortize
$146,000 to expense over 36 months for the other shares.
Of
the 390,000 shares granted to Mr. Stabio, 125,000 shares were relinquished
back
to the company as consideration for the income taxes due. Mr. Stabio also
exercised 200,000 of his
400,000 options
at an exercise price of $2.30 per share.
10
ITEM
3. CONTROLS AND PROCEDURES
We
maintain a system of disclosure controls and procedures that are designed for
the purposes of ensuring that information required to be disclosed in our SEC
reports is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information is accumulated
and communicated to our CEO as appropriate to allow timely decisions regarding
required disclosure.
As
of the end of the period covered by this report, we carried out an evaluation,
under the supervision and with the participation of our CEO of the effectiveness
of the design and operation of our disclosure controls and procedures. Based
upon that evaluation, our CEO, who is also our CFO, concluded that our
disclosure controls and procedures are effective for the purposes discussed
above. There has been no change in our internal control over financial reporting
during the quarter ended September 30, 2007 that has materially affected, or
is
reasonably likely to materially affect, our internal control over financial
reporting.
PART
II—OTHER INFORMATION
ITEM
6.
EXHIBITS
(a)
10.1
-
Subscription Agreement - Cortlandt S. Dietler
10.2
-
Subscription Agreement - Murchison Capital Partners
10.3
-
Subscription Agreement - Yorktown Energy Partners VII, L.P.
10.6
--
Purchase and Sale Agreement dated effective as of October 5,2007
between
Hallador Petroleum Company, as Purchaser and Savoy Energy Limited
Partnership, as Seller
31
-- SOX 302
Certification
32
-- SOX 906
Certification
SIGNATURE
In
accordance
with the requirements of the Exchange Act, the Registrant has caused
this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
I
have
reviewed this quarterly report on Form 10-QSB for the quarter ended
September 30, 2007 of Hallador Petroleum
Company;
2.
Based
on my
knowledge, this report does not contain any untrue statement of a
material
fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were
made,
not misleading with respect to the period covered by this
report;
3.
Based
on my
knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects
the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
4.
I
am
responsible for establishing and maintaining disclosure controls
and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
for
the registrant and I have:
a)
designed
such
disclosure controls and procedures, or caused such disclosure controls
and
procedures to be designed under my supervision, to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to me by others within those entities,
particularly during the period in which this report is being
prepared;
b)
evaluated
the
effectiveness of the registrant's disclosure controls and procedures
and
presented in this report my conclusion about the effectiveness of
the
disclosure controls and procedures, as of the end of the period covered
by
this report based on such evaluation; and
c)
disclosed
in
this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter
(the registrant's fourth quarter in the case of an annual report)
that has
materially affected, or is reasonably likely to materially affect,
the
registrant’s internal control over financial reporting; and
5.
I
have
disclosed, based on our most recent evaluation of internal control
over
financial reporting, to the registrant's auditors and the audit committee
of registrant's board of directors;
a)
all
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
b)
any
fraud,
whether or not material, that involves management or other employees
who
have a significant role in the registrant's internal control over
financial reporting.
CERTIFICATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the Quarterly Report of Hallador Petroleum Company (the
"Company"), on Form 10-QSB for the period ended September 30, 2007, as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
the undersigned, in the capacities and dates indicated below, hereby certifies
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that to his knowledge: (1) The Report fully complies
with the requirements of Section 13(a) or 15(d) of the Securities Exchange
Act
of 1934; and (2) The information contained in the Report fairly presents, in
all
material respects, the financial condition and results of operations of the
Company.
